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Photo credit: Harbor

Real estate transactions move at a snail’s pace in the U.S., with ownership tracked on pieces of paper. But crypto startup Harbor thinks it has found a way to turn real estate into a liquid asset with digital, tokenized securities.

The San Francisco company announced $28 million in new investment, led by Peter Thiel’s Founders Fund. Andreessen Horowitz and crypto investment firms Pantera Capital and Craft Ventures also invested. Harbor had already secured $10 million in funding in February, and it has collected $40 million to date.

David Sacks, a PayPal cofounder and former Zenefits CEO, came up with the idea for a security token startup last year. He named himself Harbor’s chairman and eventually recruited three former Zenefits executives to run the company. Arisa Amano and Bob Remeika became Harbor cofounders in August 2017, and Josh Stein joined as CEO and general counsel in March 2018.

Harbor aims to take hard-to-trade assets like real estate and private equity and use blockchain technology to turn them into tokenized securities that comply with SEC regulations. For example, let’s say an investor group wants to create a private real estate investment trust (REIT)—a company that owns income-generating real estate. In launching their business, “95% of what they do remains the same as it was,” CEO Josh Stein says. “They find a property, form an investment thesis, run an analysis and do marketing.” The difference comes in how regulatory information is stored and securitized.

The REIT must comply with complex federal rules. It can only accept accredited investors, individuals with either a net worth of over $1 million or annual income exceeding $200,000. Those investors must pass “Know Your Customer” (KYC) and “Anti-Money Laundering” (AML) checks. The REIT needs at least 100 investors, but the top five shareholders can’t own more than 50% of the company.

Harbor helps perform such compliance checks by having investors visit its website and enter their information, storing it electronically. It mints a “Regulated Token” (“R-Token”) to create a digital version of the tangible real estate asset. When someone wants to transfer an asset, compliance checks can then be done on the fly. For instance, if an accredited investor tries to sell an R-Token to a nonaccredited investor, Harbor will generate an error and prevent the trade from going through.

And where is the financial identity data stored? “Some is stored with Harbor,” Stein says. “Some stays with vendors or agencies that supplied the information. And some gets written to the blockchain.”

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The ability to resell the tokenized security is the R-Token’s critical feature. “Today, with private paper securities, liquidity is terrible,” Stein says. “They don’t trade very much. By tokenizing, we will get far more trading.”

Where will the tokens trade, and who will buy them? The R-Token is based on Ethereum’s ERC20 technical infrastructure, making it theoretically tradable on any crypto exchanges that support ERC20 tokens, Stein says. But no exchanges have legal permission to trade security tokens. “Currently a dozen or so exchanges are in [the] process of getting licensed, but none are today.” The tokens can also trade peer-to-peer.

Stein thinks demand for R-Tokens will be naturally high, simply because current interest in crypto assets is high. “Imagine what the appetite will be when there are real buildings that those token will represent,” he says. Harbor will launch its first securities token with a client this summer.

The startup isn’t the first company to pursue securitized tokens. Overstock’s subsidiary tZERO is running a private sale for a security token and is building a trading platform that’s still “in the early stages of development,” according to the company’s annual report.

Canadian startup Polymath launched a security token platform in early 2018, although it hasn’t yet launched a security token. “We were the first mover in the space,” Polymath CEO Trevor Koverko says. “We coined the term ‘security token.’”

One of the primary differences between Polymath and Harbor is that Polymath has a broader target customer. Instead of focusing on niches like real estate or private company investors, it’s trying to recruit anyone who wants to launch his or her own security token. Polymath has created a network of advisory businesses, such as a venture capital fund and a marketing firm, to help people issue tokens.

Revenue model is another key difference. For Polymath, “We have a decentralized business that doesn’t have a revenue stream, like Ethereum,” Koverko says. “It’s open-source and supposed to be self-sustaining.” He adds that revenue can come from consulting services for applications built on Polymath. And Harbor is taking a more traditional approach. “We’re pricing our services in the way you traditionally price software,” Stein says, declining to go into further details.

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